Job

Costing

Presentation
 Objective 1

To Teach Job Costing

 Cost Systems
• There are two basic systems used by
manufacturers to assign costs to their
products:

Job order costing

Process costing
 Process Costing Example
• Laxmi Foods Company produces a garlic
flavored tomato sauce.
• Production of the sauce requires two major
processes:

Chopping Mixing and Canning

 Process Costing Example
• Assume that Laxmi incurred $20,000 in
the Mixing and Canning process to mix
100,000 pints of tomato sauce.
• What is the Mixing and Canning cost per
pint?

$20,000 ÷ 100,000 = $0.20/pint

 Job Costing
• It is used by a manufacturer who produces
products as individual units or in distinct
batches or jobs.
 Job Costing Example
• Ram, Sham, and Co. is a small furniture
manufacturing business in Texas.
• They received an order for 10 chairs from
a customer in Kansas City.
 Job Costing Example
• Total cost for the job was $500.
• How much was the cost per chair?

$500 ÷ 10 = $50/chair
 Job Costing

• Job cost record is a document used to

accumulate the costs of a job.
 Job Cost Record Example

Job Number: J9738 Date Promised: 9/11/06

Customer: Miami Motors Date Started: 8/03/06
Job Description: 300 automobile engine valves
Engineering Design Number: JJJ-100
 Job Cost Record Example

Material
Requisition
Number Description Quantity Rate Amount

47624 Bar steel 720 lbs $11.50 $ 8,280

stock 3”
A35161 Subassemblies 290 units $38.00 11,020

Total direct materials cost: $19,300

 Job Cost Record Example

Dates Number Hours Rate Amount

8/2,3,4,5 M16 24 $28 $ 672
8/2,3,4,5 M18, M19, M20 64 $26 1,664
8/6,7,8,9,10 A25, A26, A27 120 $18 2,160
8/6,7,8,9,10 A32, A34, A35 61 $17 1,037

Total direct labor cost: 269 $5,533

 Job Cost Record Example

Manufacturing Overhead Amount

118 machine hours @ $40 per hour $ 4,720
269 direct labor hours @ 36 per hour 9,684

Total overhead cost: $14,404

 Job Cost Record Example

Total cost $39,237

Number of units produced 300
Cost per unit $130.79
 Objective 2

Trace Materials and

Labor in a
Manufacturer’s
Job Costing System.
 Materials Cost
• Companies using job costing often use a
perpetual system to account for direct
materials.
• A materials requisition is used to request
transfer of materials to the production
floor.
 Materials Cost Example

• Alec Clothing Co. purchased raw materials

on account for $15,000.
• Materials costing $10,000 were
requisitioned for production.
• Of this total, $2,000 was indirect materials.
 Materials Cost Example
Direct materials
Materials Inventory WIP Inventory
15,000 10,000 8,000

Manufacturing Overhead
2,000
Indirect materials
 Labor Costs
• Labor costs are accumulated using the
payroll register and time records.
• Labor time records identify the employee,
the amount of time spent, and the cost
charged to each job.
 Labor Cost Example
• The company incurred $30,000 of
manufacturing wages for all jobs.
• Assume that $25,000 can be traced directly
to the jobs and $5,000 is for indirect labor.
 Labor Cost Example
Direct labor
Manufacturing Wages WIP Inventory
30,000 30,000 25,000

Manufacturing Overhead
5,000
Indirect labor
 Objective 3

Allocate Manufacturing
Overhead in a
Manufacturer’s Job Costing
System
 Manufacturing Overhead Costs
• The company incurred $20,000 of plant
equipment depreciation.

Manufacturing Overhead
(Deprec.-Plant and Equipment) 20,000
Accumulated Depreciation
(Plant and Equipment) 20,000
To record plant and equipment depreciation
 Manufacturing Overhead Rate
• At the beginning of the year, a
predetermined manufacturing overhead
application rate is computed.
• This rate is used to apply overhead to all
jobs completed during the year.

Estimated overhead ÷ Estimated base = Rate

 Six Steps in Allocating
Manufacturing Overhead Cost
1 Estimate total overhead for the period.
2 Select an overhead allocation base.
3 Estimate total quantity of the overhead
allocation base.
4 Compute the predetermined overhead rate.
 Six Steps in Allocating
Manufacturing Overhead Cost
5 Obtain actual quantities of the overhead
allocation base.
6 Allocate manufacturing overhead by
multiplying the predetermined
manufacturing overhead rate by the actual
quantity of the allocation base that pertains
to each job.
 Manufacturing Overhead
Example
• Alec Clothing Co.’s total estimated
overhead for the year equals $243,000.
• The predetermined overhead rate is based
on 4,500 direct labor hours.
• What is the predetermined overhead rate?

$243,000 ÷ 4,500 = $54

 Manufacturing Overhead
Example
• Assume that Job 51 used 200 direct labor
hours.
• What is the journal entry to record the
manufacturing overhead applied?

Work-in-Process Inventory 10,800

Manufacturing Overhead 10,800
To record overhead applied to Job 51
 Objective 4

Account for Completion and

Sales of Finished Goods, and
Adjust for Under-or-
Overapplied Manufacturing
Overhead
Accounting for Finished Goods,
Sales, and Cost of Goods Sold
• As jobs are completed they are transferred
to finished goods inventory.
• In addition to the overhead applied to Job
51, direct labor was $4,000 and direct
materials totaled $30,000.
• How much was transferred to Finished
Goods Inventory?
 Accounting for Finished Goods,
Sales, and Cost of Goods Sold
Direct materials $30,000
Direct labor 4,000
Manufacturing overhead 10,800
$44,800

Work in Process Finished Goods

44,800 44,800
 Accounting for Finished Goods,
Sales, and Cost of Goods Sold
• Assume that Job 51 was sold for $74,800.
• What are the journal entries?

Accounts Receivable 74,800

Sales Revenue 74,800
Cost of Goods Sold 44,800
Finished Goods Inventory 44,800
To record sale of Job 51
 Accounting for Finished Goods,
Sales, and Cost of Goods Sold
Work in Process Finished Goods
44,800 44,800 44,800

Cost of Goods Sold

44,800
 Disposing of Underallocated or
Overallocated Overhead
• Suppose that the company incurred
$232,000 of actual manufacturing
overhead during the year, and that actual
direct labor hours worked were 4,000.
• The actual manufacturing overhead rate
would have been $232,000 ÷ 4,000 = $58.
• The predetermined rate was $54.
 Disposing of Underallocated or
Overallocated Overhead
• How much overhead was allocated to the
various jobs?
• 4,000 direct labor hours × $54 = $216,000
• What is the underallocated amount?
• $232,000 actual – $216,000 allocated
= $16,000
 Disposing Underallocated
Overhead to Cost of Goods Sold
Manufacturing Overhead
232,000 216,000
16,000
0

Cost of Goods Sold

16,000
 Disposing Overallocated
Overhead to Cost of Goods Sold
• Assume the opposite situation in which allocated
overhead is $232,000 and actual overhead is
$216,000.
• How do we dispose of overallocated overhead?
• Debit the Manufacturing Overhead account and
credit the Cost of Goods Sold account to decrease
the costs that went to the income statement.
 Disposing Overallocated
Overhead to Cost of Goods Sold
Manufacturing Overhead
216,000 232,000
16,000
0

Cost of Goods Sold

16,000
 Objective 5

Assign
Noninventoriable
Costs in Job Costing.
 Job Costing in a
Nonmanufacturing Company
• How is direct labor traced to individual
jobs in a nonmanufacturing company?
• Employees complete a weekly time record.
• Jim, Abby, and Associates is a firm
specializing in composing and arranging
music parts for different clients.
• Musician Judy Lopez’s salary is $80,000
per year.
 Job Costing in a
Nonmanufacturing Company
• Assuming a 40-hour workweek and 50
workweeks in each year gives a total of
2,000 available working hours per year
(40 hours × 50 weeks).
• What is her hourly rate?

80,000 ÷ 2,000 = $40

 Job Costing in a
Nonmanufacturing Company
• Jim and Abby estimated the indirect costs
that will be incurred in 2006.
Advertising $ 15,000
Depreciation 6,000
Maintenance 12,000
Office rent 60,000
Office support 47,000
Travel 20,000
Total indirect costs $160,000
 Job Costing in a
Nonmanufacturing Company
• Assume that they estimate that the
musicians will work 8,000 direct labor
hours in 2006.
• What is the predetermined indirect cost
rate?

160,000 ÷ 8,000 = $20

 Job Costing in a
Nonmanufacturing Company
• Records show that Judy Lopez worked 25
hours servicing Los Abuelos Music Co.
• What is the total cost assigned to this
client?
Direct Labor: 25 hours × $40 = $1,000
Indirect costs: 25 hours × $20 = 500
Total costs: $1,500
 Thanks
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